Which Beverage Makers Will Quench Japan's Thirst for Bottled Water?
Residents of Tokyo are stockpiling bottled water as fears of radioactive contamination of Japanese tap water mount. And as fast as water is flying off store shelves, investors are moving even faster to snap up shares in beverage companies that may potentially benefit from an uptick in sales.
Industry and Wall Street analysts, however, say that only a handful of companies are likely to be able to quench the thirst either of the Japanese or of investors. Bottled water is heavy and expensive to ship, and once it reaches retail outlets, it's usually sold at prices below those of carbonated drinks or alcoholic beverages. Companies able to source their water and bottle it in Japan or in nearby countries have the best shot at benefiting from the higher demand.
The contamination issue traces back to containment failures at the Fukushima Daiichi nuclear plant, 170 miles northeast of the capital. The run on bottled water in began when the Japanese government reported finding traces of radioactive iodine from Fukushima in tap water in Tokyo, though the government noted at the time that the levels were within an acceptable range. Fears escalated Wednesday when authorities warned residents of the affected areas and Tokyo that infants under 1 year old should not be given tap water because the levels were twice what was considered safe for babies to drink. Infants are particularly vulnerable to radioactive iodine, which can cause thyroid cancer, the Associated Press notes.
Facing a severe shortage of bottled water, the government said it was considering importing bottled water to supplement the nation's existing supply, according to a New York Times report.
A 10% Jump in Sales?
A substantial increase in bottled water consumption is expected this year in Japan, which traditionally has seen only minor yearly increases, if any at all, says Philippe Chan, an Asia manager for beverage market researcher Canadean Ltd.
"We now expect to see an 8% to 10% increase in volume for bottled water for the next three to four months and, if this situation continues through the end of the year, volume may go up 10% to 12%," Chan said, who is based in Hong Kong. "Bottled water in Japan has been flat over the last few years. It's a mature market and, at best, it's gone up 1% or 2%, unless it has exceptionally hot weather."
Prior to the catastrophic 9.0 earthquake and tsunami, Canadean estimated that bottled water sales in Japan would be flat or decline this year compared to 2010, when an estimated 2.4 billion liters of bottled water were sold there.
Switching to Other Drinks
"The news about the water appears to be a net positive for beverage manufacturers," said Philip Gorham, a Morningstar analyst, via email. "The affected area is still quite small, so the disruption to infrastructure and distribution is limited, while the benefit of increased sales of bottled water could be large and more widespread."
He noted that consumers may turn to other beverages, such as bottled juices, soda or teas, as water becomes more scarce and concerns about drinking the tap water linger. And those products carry a higher profit margin, which would benefit beverage companies with a presence in Japan.
As the AP and other media outlets have pointed out, however, radioactive iodine doesn't stay radioactive for long. Its half-life -- the time it take for half of it to break down into harmless elements -- is just eight days.
The Fall and Rise of Beverage Stocks
Kirin Holdings, Japan's largest beverage maker, saw its shares take a hit in the days immediately following the disaster as companies struggled to assess the damage to their operations and distribution. But as information emerged about the radioisotopes in tap water, Kirin and other major Japanese beverage suppliers saw their shares rebound. Since hitting a low point of 962 yen on March 15, Kirin's shares have risen 11.8% to close at 1,076 yen Friday on the Tokyo Stock Exchange.
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Over the same period, Asahi Breweries shares have climbed 9.3% to close at 1,436 yen. And Coca-Cola West has soared 25.7% to close at 1,494 yen -- slightly higher than its shares were trading before the earthquake. Kirin and Asahi are approaching the trading levels they saw just before the disaster.
U.S.-based Coca-Cola (KO) shares, meanwhile, are up 5.6% since March 16 in intra-day trading. Wall Street analysts note that while Coca-Cola derives 9% of its global beverage sales from Japan and 13% of its operating income from the country, the company is not likely to see its sales in Japan surge as a result of the disaster.
"Japan is a small part of Coca-Cola's business. It's not that large a piece to their revenue pie," says one analyst at a major Wall Street firm, noting that while the company may benefit from greater sales to the country, the additional costs to export bottled water and other beverages from its company-owned bottling plants in China and the Philippines may not help its bottom line.
How Long Before the Water is Safe?
Coca-Cola is the only major foreign beverage company in Japan that sources its water from within the country. PepsiCo (PEP), uses a partner to manufacture and distribute its drinks in Japan, and Unilever (ULVR) also does not produce water products in the country, Chan says. These three companies control nearly 30% the market for non-alcoholic beverages in the country, with the remainder controlled by Japanese beverage companies.
Coca-Cola and other beverage makers are donating money and beverages to the affected areas of Japan. That doesn't add to corporate coffers directly, but the goodwill it may generate among residents of Japan may provide a financial benefit down the road.
"A lot of companies donate water, but there will also be an influx of sales," says Gary Hemphill, managing director of the research firm Beverage Marketing Corp. "With Hurricane Katrina, we saw a spike in sales for a specified time of a month, or two or three and then it reverts back to its previous levels. The difference is if a safe water supply can't be guaranteed, then that will dictate whether water sales stay at an elevated level for a period of time or return to pre-disaster levels."
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